Innovation keeps Borsa on toes

Europe’s fourth largest exchange has continued to show healthy signs of growth across all products over the past 12 months, and is enjoying a steady, if fluctuating, recovery from the tech stocks crisis. Much of this strength can be traced back to a management team which is not afraid of innovation, and examples of this can be found in a three-pronged response involving a new market segment, plans for new futures products and discussions with hedge funds. Although the MIB30 was off some 18% by the end of the first quarter of this year at 38,991 just a month later it had climbed by 5%. By mid-May, however, the index had settled around the mid-point of those positions. Around a fifth of the value of the Nuovo Mercato was also wiped off to the end of March, and having stabilised during April, May saw it slipping back to a position well below the first quarter mark. The year so far, then, can be seen as something of a roller coaster ride, even if the peaks and troughs are not too far apart. In the wake of this one might expect caution, but Milan famously does not follow trends. Earlier this year the Borsa introduced the new High Standard Mid Cap Market (STAR) segment. Announced back in February the aim was to create a segment dedicated to medium and small cap companies, which would attract transferred listings and IPOs from the “old economy” companies. Linked to a number of information sites the Borsa is confident that STAR will improve visibility for companies and more company information for investors. The hope is that this will be provided by the Borsa’s own website, which is among the most popular in Europe in terms of hits. The result is that the electronic equity market (MTA) is now divided into three. Firstly there are the blue chip stocks of the MIB30, MIDEX and others which boast a capitalisation threshold of s800m. Then comes the new STAR segment, which the Borsa describes as being dedicated to “traditional small and medium cap companies, with high standards”. Finally, the “ordinary segment” for all others completes the triptych. “Although it is too early to have any hard data, the feed back so far has been very positive,” said Daniella Tofcani, head of STAR in Milan. “All the institutions I have spoken to so far are very supportive on the principles of the project. Nevertheless I believe there is still work to be done in terms of marketing and communication.” This is hardly surprising given that there are currently just 20 companies listed out of a total market capitalisation of e5 trillion. Nevertheless Ms Tofcani says that there are indications that even at this early stage the liquidity of some of these stocks has increased since their listing on STAR. Of the 20 listings all have transferred, and to date there have been no IPOs, although the names of a number of companies have been mooted, including the holding company of sports clothing group Sergio Tacchini and energy drinks makers Enervis.

Within STAR the exchange has addressed a number of issues. First of all on liquidity, the initial free float for shares will be 35% of ordinary shares for IPOs and 20% for listed companies, and a permanent free float of 20% The Borsa also insists on the appointment of a market specialist to support stock liquidity. This is an interesting move as it flows contrary to the thinking of the Euronext exchange, whose trading model insists on the abolition of the stock jobber. There may well be problems similar to those being experienced by the Amsterdam Exchange should Milan eventually join the Euronext stable. Companies wishing to list on this segment will also be subject to new rules on transparency and corporate governance. Institutional investors will hope that any improvements in liquidity and transparency will ease investment choices. Here Tofcani believes the decision to employ specialists will prove prescient. “One should not look at this innovation in a global sense. The whole project is focused on the specific needs of the Italian economy and the fact that we have plenty of medium and small cap companies which make up the majority of our active economy, and the problem that they are not reflected by the stock exchange. For example, on the exchange as a whole we have just 146 small and medium cap listed companies which represent a small proportion of the overall capitalisation, and traded volumes. One of the main aims is to increase the liquidity of this kind of stock, and we believe that the role of the specialist is crucial. It is not only in this area, but also in the area of raising the visibility of these companies, which is the other main aim of the project. The specialist can help here, writing at least two reports a year, by meeting with institutional investors and releasing information about the companies throughout the year.” Tofcani says that she is confident that there will be many more listings over the summer. “We are looking to allow entrants in blocks, rather than individual additions,” she said. Although the Borsa strategy is grouped around STAR, there are other plans to expand the number of products on offer. Prime among these are stock futures and hedge funds. Although there were suggestions earlier in the year that the exchange hoped to offer more single stocks futures of Italian shares, Anna Maciano at the Borsa says that such plans are very much at the preliminary stage. “We are planning such a project, but we will certainly not be launching in June,” she said. Certainly the fact that Telecom Italia and ENI, the energy giant, are among Liffe’s universal stock futures will prove an incentive for Milan to get this product off the ground quickly. So far as the introduction of hedge funds is concerned, the horizon is clouded by secrecy. Interest in the funds has come on back of the spectacular growth of options, futures and equity derivatives since the end of 1998. Later this month the Borsa’s Raffaele Jerusalmi is due to hold a closed-doors seminar for hedge funds, outlining the advantages Milan can offer. The exchange’s chief executive Massimo Capuano is on record as favouring hedge funds’ strategies. His theory is that they help not only to increase volumes when there is a downturn in the market, but also to provide some stability at such times. While some chief executives would take the opposite view when it comes to stability, the fact that the Bank of Italy has passed regulations allowing for the incorporation of hedge funds and fixed capital gains tax at a generous 12.5%, shows that the issue is being taken seriously. Whether the funds themselves will take the opportunity seriously remains to be seen. Analysts in both Milan and London remain sceptics on the issue.